Question: When comparing levered versus unlevered capital structures, why does leverage work to increase EPS for very high levels of earnings before interest and tax (EBIT)?

When comparing levered versus unlevered capital structures, why does leverage work to increase EPS for very high levels of earnings before interest and tax (EBIT)?

A.

Because interest payments on debt can be put off until some date in the future such as the date of debt maturity

B.

Because interest payments on the debt stay fixed, leaving the remaining income to be distributed among less shares of stock

C.

Because interest payments on debt vary with EBIT levels

D.

Because the risk of debt, in almost all states of the world, is greater than the risk of equity

E.

Because other things equal, more taxes are paid in levered capital structure than in unlevered capital structure

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